estate planning
When Steve Jobs, the co-founder of Apple, died, he left most of his property to his wife and children. As his health was declining, he apparently undertook extensive estate planning. But how will Tim Cook, the current CEO of Apple – and single – handle his estate? And what about everyone else who is single? Covid-19 has made these issues even more critical.
Estate planning for single people is, perhaps, even more important than for married people. That’s because, if a married person dies without a will (intestate) or other form of estate planning, then state default rules will distribute that person’s property to family members, with a spouse potentially receiving the entire estate (state laws vary, so it is impossible to generalize), and, if there are children, they may share as well. The assumption is that fits with what the person would have done with advance planning. If a married person becomes incapacitated, then the spouse is, again, the default.
By contrast, if a single person dies without a will, then the default rules in most states distribute the property to the nearest relatives based not on emotional closeness but on legal relationship (and a parent is typically favored over a sibling). A charity is not on that list. Neither are friends, who, according to Singled Out author Bella DePaulo, are often among the most important people in the lives of single people.
For many people, married or single, the default rules work, and there is no need to plan. But for anyone who wants to opt out of the default rules, then there are a series of potential steps that can be taken.
The most straightforward is to draft a will, specifying who should receive what. That property might be treasured books, or it might mean Apple stock, or it might mean money for favored charities; a valid will prevents the state’s default rules from specifying who receives that property. In about half of the states, a handwritten will is valid (states vary as to just how much of the will must be in the handwriting of the testator (the person signing the will). And states are increasingly allowing some form of electronic will (again, the requirement vary). A will can control any property that a person dies owning, and, once the testator dies, a will is generally filed in court (probated). That means there is court supervision of how the property is distributed. A will typically names an “executor” or “administrator” to handle collecting all of the property and distributing it.
A second estate planning device is one that many of us have probably done without thinking of it as estate planning: if you’ve ever opened a bank account as a joint account with someone else, if you’ve ever signed up for an employer’s retirement plan, you may have designated a beneficiary. These “nonprobate” planning devices, often called will substitutes, mean that your property goes directly to that other person, without needing to go through probate. You still have control during your lifetime, and you can change the beneficiary on an insurance policy or a retirement account. A related possibility is making a gift during your lifetime. You can give any individual property valued at up to $15,000 (in 2021, going up to $16,000 in 2022) without needing to file a gift tax return; a gift to any individual over that amount will be taxable. Still, if you have 10 friends and want to give each $15,000, then you can do so. Money can be given to a charity tax-free and may result in an income tax deduction, according to Bridget Crawford, a professor of law at Pace University in New York who specializes in tax and trusts and estates (and has practiced in the area). This year, even people who do not itemize can take a deduction of $300 for gifts to charity this year.
A third is a trust. Trusts have a number of benefits over a will, although they can be more difficult to set up. First, a trust is a private document; because wills are generally filed in court, they become public documents. Second, the person setting up the trust (the grantor or settlor) can control everything in the trust during that person’s lifetime (serving as trustee), and even receive income from the trust. These are often called “living trusts.” When one trustee dies, a trust typically provides for a successor trustee, for someone else to take over management. The property in the trust does not then go through probate. A will can also pour over any property leftover into the trust (that property, however, goes through probate). Third, a trust can be oral; that’s not advisable, as it is harder to prove the terms, and some states require that transfer of some assets (like land) be in writing.
A misconception about trusts is that they will avoid estate taxes. First, estate taxes (at least this year) only apply if your estate is over approximately $11.7 million (going up to $12.06 million in 2022). Second, a trust can avoid estate and gift taxes, but only if you relinquish control. A typical living trust, explains Crawford, the trusts and estates expert, does not prevent estate taxes. “Living trusts typically are used to preserve privacy in estate planning or to provide for seamless transition when the grantor of the trust becomes mentally incapacitated or dies. But there’s no tax savings associated with living trusts,” Crawford said.
A trustee and a will executor have legal obligations to carry out the wishes expressed in the document. They cannot use the money for themselves. In terms of who to appoint, the best advice is to appoint someone you trust and, where possible, someone who knows you well so that, if anything is ever unclear (or challenged in court), that person can articulate your intent.
Planning is important, but more than two-thirds of Americans don’t have a will. You don’t have to be Steve Jobs to engage in estate planning.
Disclaimer: this is not to be construed as legal advice!
